organization structure
The organizational structure of mezzanine funds generally adopts limited partnership system, with an unlimited partner as the fund manager, providing 1% of the funds, but assuming unlimited liability. The remaining fund providers are limited partners, providing 99% of the funds, but only need to bear limited liability within the share of the funds provided. About 20% of the expected annualized income of the fund is allocated to the fund manager and the rest to the limited partners. The fund manager of mezzanine fund, also known as leveraged buyout, as the consultant of management, is responsible for organizing the whole MBO transaction structure, especially the financing structure, and providing mezzanine fund financing, which is the soul of an MBO transaction.
function
Mezzanine funds participate in an MBO transaction, which reduces the demand for senior creditor's rights funds and equity funds for transaction financing, and improves the security of senior creditor's rights funds such as bank loans. Because the mortgage coefficient of enterprise assets is improved, MBO transactions can easily obtain bank loans. In addition, the involvement of mezzanine funds has also increased the attractiveness of MBO transactions to equity capital providers, because mezzanine funds have their own inherent expected annualized expected rate of return when choosing investment projects. Compared with mezzanine funds, equity capital can obtain higher expected annualized return on investment.
Expected annualized interest rate of fund loans
Mezzanine funds generally provide unsecured loans. Therefore, loan repayment mainly depends on the cash flow generated by enterprise operation, and the expected annualized interest rate of fund loans is higher than that of bank loans. The expected annualized interest rate of mezzanine fund loans is the expected annualized interest rate of standard money market funds (such as LIBOR) plus 3-5%. In addition, if the enterprise runs smoothly after three to five years, the fund generally requires a final payment, which is generally paid to the mezzanine fund by the enterprise subscribing for common shares.
Expected annualized expected return on investment
Generally, five years after the completion of an MBO, if the target enterprise was originally a listed company, the enterprise has gone through the process of delisting, restructuring and re-listing; If the target enterprise is a non-listed company, the enterprise has been reorganized and listed. At this point, the fund providers have withdrawn: the management sells stocks, mezzanine funds and banks all recover the loan principal and interest. Due to the different risks borne by different funds in the financing structure of MBO at all levels, the expected annualized expected returns of different funds are also different, which is quite different. The expected annualized rate of return required by general equity fund providers is above 40%, that required by mezzanine funds is between 20% and 30%, and that required by banks is 2 percentage points higher than the benchmark expected annualized interest rate (such as LIBOR).
Comparison between mezzanine fund and venture capital fund
From the organizational structure, mezzanine funds and venture capital funds are very similar, but mezzanine funds are not equity investments and do not require the acquisition of corporate equity, while venture capital must be equity investments with different investment targets. In addition, the size of mezzanine funds is smaller than that of venture funds.